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Is Robinhood’s IPO Worth Investing In?

The controversial trading app is preparing to go public in the year’s most highly-anticipated IPO, but is Robinhood worth investing in?

This week is a big one for tech IPOs. Robinhood is finally making its stock market debut while Duolingo also prepares to go public. The free trading app that brought investing to the masses is now bringing its own shares to the public, and Wall Street is excited —  despite the firm often making headlines for all the wrong reasons over the past year.

When the company lists its shares on the Nasdaq exchange this Thursday, institutional investors will, as normal, be able to buy the stock. However, Robinhood is switching things up by also selling a portion of its shares on its retail trading platform so its customers can get in on the IPO action. 

So is investing in Robinhood’s IPO a good idea? 

What is Robinhood? 

Robinhood is a financial services company that is best known for offering commission-free trading of stocks via a mobile app. Its services launched in 2015 and since then the app has become very popular with retail investors. 

How many users does Robinhood have? 

In its S-1 filing, Robinhood stated that it has 18 million accounts with $80 billion in assets.

Is Robinhood profitable? 

Unlike other recent IPOs, Robinhood reached profitability last year. The company recorded a net income of $7.45 million on revenue of $959 million in 2020 compared to a loss of $107 million on $278 million in 2019. 

For the first quarter, Robinhood brought in $522 million in revenue, up 309% year-over-year. 

Options trading made up around 38% of that revenue while equities and cryptocurrency trading accounted for 25% and 17%, respectively.

However, January’s GameStop trading drama resulted in the firm losing $1.4 billion in Q1 as it needed emergency fundraising to cover the losses it experienced when it halted trades of the video game retailer. This move also cost the company in many other ways, namely in reputation. 

How much will Robinhood shares cost?

Robinhood is targeting an IPO price range of between $38 and $42 per share at a predicted market debut valuation of around $35 billion. The company hopes to raise $100 million from its IPO. 

But is Robinhood worth investing in when it IPOs? 

If you have read our blog before, or subscribe to the MyWallSt app, you will have noticed that we always recommend investors wait until a company posts at least two quarterly earnings reports as a public company before they invest. If you take on this rule, you will avoid the volatility that a stock usually experiences following its market debut. Another bonus is that you get to have a good look around its books before taking the plunge to buy shares. Basically, it is a much less risky way of investing in new companies. 

If you want more information about our opinion on Robinhood’s IPO, make sure to listen to our recent episode of the Stock Club podcast. We discuss the company’s questionable sources of revenue, 6% of which was derived from Dogecoin transactions this past quarter, and how its app has transformed retail investing forever.  

Is Robinhood a buy? 

With a sky-high valuation, concerning legal suits against the company, and a bad reputation amongst financial experts, Robinhood is looking like a risky investment. However, its revenue growth is impressive and the app is very popular with retail investors because of its commission-free trading. 

Some experts have noted that the only reason it can offer this is that it uses payment for order flow. Robinhood makes a profit from its customers’ trade as market makers like Citadel Securities or Virtu, pay digital brokers for the right to execute their customer trades. Robinhood then receives a small fee for these shares. 

This process has been banned by the UK as they believe it violates the broker’s duty to offer the best execution of trades. Many have suggested that payment for order could be banned in more countries. This would not only affect Robinhood’s international expansion, but if the U.S. decided to ban it also, the company may not be able to offer free trading, its biggest pull for customers.  

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MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in companies mentioned above. Read our full disclosure policy here